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Why you should have an emergency fund

By web gangsta | Published:February 28, 2013

Lots of financial experts will tell you how important it is to have an emergency fund.

Heck, even Web Watch has told you about the plan to have $10,000 in savings before you turn 30. And while $10,000 in the bank today may not mean as much as what it did 10 or 20 years ago, if you’re able to pull this off then you’re still doing better than the vast majority of people you hang around with.

Look, we know that saving money is hard (especially when spending money can be so much fun).

But having an emergency fund — which experts say should represent anywhere from three to six months of living expenses, depending on your personal situation — is becoming more and more critically important in today’s economy.

A RECENT SURVEY FROM BANKRATE says that Americans may finally be getting the message, as for the first time in a while, Americans are reporting having more savings than credit card debt. A full 55% of those surveyed said that they have an emergency fund that is larger than their outstanding debt.

On the other hand, there’s still 24% of those surveyed who have more credit card debt than they could cover with their checking or savings accounts.

Of the rest — there’s 16% that say that they don’t have any credit card debt at all (good for them!) but they also don’t have any savings, either (oh, so close).

Who’s more likely to have an emergency fund that was larger than their debt? 60% of those responding were men.

And it doesn’t matter how much money you make as to the likelihood of having tons of credit card debt — about 25% (give or take) of all income levels surveyed all reported having more debt than savings.

The average amount of money that people are saving is hovering around 4% of income. So while that’s helpful to meet short-term needs, it’s not enough to use when thinking about long-term goals.

So what should you do?

Just like being on a diet, where you will naturally lose weight simply by taking in fewer calories than you need, money management is just the same way: you need to put away even more money than you think you’ll spend.

You could try all those methods of “skip having one cup of Starbucks coffee a day” or “start bringing your lunch to work instead of eating out every day”, but sometimes those aren’t entirely practical.

So keep it simple.

It always comes down to “pay yourself first”. Regardless of how much credit card debt you have and the payment process that you’re going through to pay those bills down, you should still include yourself on the list of creditors.

Start with something easy to think about. $1 a day.

Can you handle putting $1 a day into a piggy bank, never to be used except for large-scale emergencies? $1 a day is easy, right? Just take that out of your wallet or purse at the end of the night and set it aside.

Or, if your bank has an automatic transfer process you can configure, set it up to take $7 per week from your checking account and move it into your savings account. $7 per week is the same as $1 a day, so that’s easy. Done automatically, you shouldn’t even miss it.

At the end of the first month, that will be $30 all set aside for yourself.

Web Watch knows what you’re thinking — $1 a day is way reasonable. Anyone can do that.

So bump the ratio up a bit. Make it $5 a day/$35 per week on that automatic transfer. At the end of the year, that will be $1825 that’s been moved into savings. That $5 a day is your Starbucks coffee drink, remember? And if you have enough buffer to allow yourself to do so, try bumping the $35/week figure to something more substantial. $10 per day/$70 per week doesn’t seem so out of reach after you’ve been comfortable at the $5 per day level for a while.

And guess what — if you do this through automatic transfer, you can still go and buy your coffee if you’d like. It’s not like you’re sacrificing one for the other; you’re just paying yourself first. Skimming a little bit off the top.

And this is in addition to any other savings plan, 401k matching, investments, etc that you’re already doing. Just automatically put money away for the future. And if you start doing this at age 24, then by the time you’re 30 you WILL have at least $10,000 saved up and be well on your way to financial independence.

There’s a lot you can do with that $10,000 when you’re 30 years old. But you need to have that money first before you can start making plans.